Let’s start by giving him credit: he actually believes that inequality matters (unlike most mainstream economists who largely ignore or explain away issues of economic inequality, now as in the past). And he does seem to understand that there’s a link between inequality and politics, an influence that runs in both directions. But, like most mainstream economists, his understanding of the relationship between inequality and politics falls short. And that’s because he doesn’t have a theory of the state, or at least a class-based theory of the state.

Then, when it comes to the relationship between inequality and financial instability, he seems to be at a complete loss. It’s a giant question mark.

Krugman’s clearly in trouble, and his mainstream economics training is not much help. So, let’s offer him some assistance: First, he needs a theory of inequality, a theory of value that explains the conditions and consequences of the growing gap between wages and productivity. Call it a theory of exploitation. Then, he needs to trace the effects of growing exploitation on both wage-earners (who go into debt to maintain consumption) and profit-takers (who funnel one portion of those profits into the salaries of managers and another portion into new financial instruments). Call it a theory of financial fragility based on capitalist exploitation.

That would give Krugman the beginnings of the theory of the link between inequality and capitalist crises he and his mainstream colleagues are missing. The real question is, do they have the intellectual honesty to learn about, utilize, and build on such a theory, or will they just throw up their hands and leave the link with a giant question mark?

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